Stepping Back & Looking At The Market

Click Here For Wyckoff Wave Chart 07-31-2015

As of Friday’s close, it did not look promising for that long-awaited Spring scenario to come to fruition.

Last Tuesday, following a sharp decline to point M, on the daily chart, demand came into the market and the Wyckoff Wave rallied. Then, the rally stalled.

As of Friday’s close, the Wyckoff Wave had barely returned to its short-term down trend channel and was unable to rally through the resistance mentioned above.

This, plus a clearly overbought Technometer, makes the Wyckoff Wave extremely vulnerable to react. While this reaction could successfully test the low at point M, it is more likely to react through point M and test the next support area. This is the support line drawn from point E.

What is happening? Are we beginning a long-term bear market or simply continuing sideways in the trading range, waiting for ending action? A look at the Wyckoff Wave from a longer-term perspective may provide some answers.

The Wyckoff Wave has been moving sideways since May 2014. However, the most important part of that sideways movement actually began, last October, at point E. While initially thought to be a shakeout of the sideways movement, the increased price spread and extremely high volume also represent climactic action.

After a strong rally to point H, the Wyckoff Wave moved sideways and, so far, has produced three phases of a trading range. The first began at point W. The second at point I and the third includes everything over to point E. These three phases had significant support lines.

Just because there was climactic action at point E, does not necessarily mean everything since then has been accumulation. It simply means a large trading range has formed and we are waiting for ending action. This ending action should result in an important move in either direction.

However, so far, the trading range has taken on characteristics that suggest accumulation, not distribution. Although supply was certainly present on the reaction from point H, it has not been a strong, or sustained. In distribution, supply is relatively strong and becomes more prevalent towards the end of the trading range.

There was also no ending action at the top of the trading range. In distribution we would’ve seen and Upthrust or a Sign of Weakness. Instead from point H to point F, the Wyckoff Wave simply reacted off resistance and did not move strongly through support areas on wide spread and high volume.

Instead, when the Wyckoff Wave reached the first two support areas, we saw some bullish activity. The Wave experienced a #3 Spring at point G. Unfortunately, a poor quality secondary test was followed by a reaction that negated the Spring.

That reaction took the Wyckoff Wave down to point K. There it met support, rallied. However, the Wave failed to reach the short term trend channel’s supply line. Then it reacted back through the support and created a potential Spring situation.

In this case, if successful it would be a #1 Spring. However, while some demand came into the market, it was not sustained and made the Wyckoff Wave vulnerable to a reaction.

There is an old Wyckoff axiom that says “beware of Springs in a downtrend”. The Wyckoff Wave is in a short-term downtrend and the potential spring at point M is very much in jeopardy.

If that Spring is not followed by a Secondary Test, the Wyckoff Wave would, most probably, continue to react and test the final support area marked by the line drawn from point E.

This could be the Wave’s final ending action. At that point, if successful, a Spring could be a precursor for the next important markup phase.

There is also the possibility it could react sharply through that support into new low ground.

As the Wyckoff Wave has appeared to be in accumulation since point E, the bearish scenario does not have a high probability of success.

This is also supported by the relationship between the Wyckoff Wave and the Optimism – Pessimism Index. The Wyckoff Wave is substantially weaker than its O – P Index. It is in a positive divergence with the Wave at point I and a positive inharmonious action at point E

Usually, before a significant decline the O – P Index is significantly weaker than its Wyckoff Wave.

This continues to suggest the ending action will be the beginning of a new, and perhaps the final, mark up phase in this seven bull market.

The climactic action and subsequent trading range is nicely presented on the weekly vertical line chart. On this chart, point A is point E on the daily chart.

The Wyckoff Wave has left its long-term up trend channel. Both the intermediate and long-term trends has been changed to neutral.

It is also putting in lower tops and lower bottoms as it reacts towards the bottom of the trading range.

So far, supply has been fairly constant and has not been increasing on reactions. This usually suggests the Spring scenario is alive and well. It’s just a matter of where and when.